Saturday, March 8, 2014

An overheated (but still bullish) stock market

Our
Composite Gauge is reflecting an overheated market.This indicator combines price oscillators
with put/call and insider transaction ratios which measure what insiders and
professionals are doing with their money.

Recent
readings of this indicator point to increased risk for the market in the short
term. The important 10-week moving
average for the Composite Gauge hasn’t yet entered bearish territory but it’s
headed in that direction, as you can see in the following graph. Historically, when the 10-week moving average
sends a reading of 45 or above it’s time to exercise caution and pull in the
horns.

Note
also that the Rydex Ratio has reached an historically “overbought” reading.
This ratio tells us that retail mutual fund investors have become inordinately
bullish in recent weeks and are likely setting the stage for a near-term top.

There
are, however, reasons for expecting the indices to push higher before the next
correction begins. The Dow Industrials
haven’t yet caught up to the S&P and should be able to do so, based on
internal momentum factors. With the Dow
Transportation Average (DJTA) recently taking a leadership role, the
Industrials are expected to follow the lead of the Transports.